Glory Mark Hi-Tech (Holdings) (HKG:8159) shares have had a really impressive month, gaining 30%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 14% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Glory Mark Hi-Tech (Holdings)

How Does Glory Mark Hi-Tech (Holdings)'s P/E Ratio Compare To Its Peers?

Glory Mark Hi-Tech (Holdings)'s P/E of 6.53 indicates relatively low sentiment towards the stock. The image below shows that Glory Mark Hi-Tech (Holdings) has a lower P/E than the average (8.5) P/E for companies in the electronic industry.

Glory Mark Hi-Tech (Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Glory Mark Hi-Tech (Holdings)'s earnings made like a rocket, taking off 76% last year. The cherry on top is that the five year growth rate was an impressive 39% per year. So I'd be surprised if the P/E ratio was not above average.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does Glory Mark Hi-Tech (Holdings)'s Balance Sheet Tell Us?

With net cash of HK$63m, Glory Mark Hi-Tech (Holdings) has a very strong balance sheet, which may be important for its business. Having said that, at 39% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Glory Mark Hi-Tech (Holdings)'s P/E Ratio

Glory Mark Hi-Tech (Holdings) has a P/E of 6.5. That's below the average in the HK market, which is 10.2. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What is very clear is that the market has become less pessimistic about Glory Mark Hi-Tech (Holdings) over the last month, with the P/E ratio rising from 5.0 back then to 6.5 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Glory Mark Hi-Tech (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.